HILSENRATH’S TAKE
Since January 2012, when the Federal Reserve announced it had a medium-run goal of 2% inflation, consumer prices have advanced at a 1.3% annual rate. As a result, consumer goods and services prices broadly are more than a percentage point lower than they would have been had the Fed been meeting its two year-old target all along the way. Now that it has missed below the target for two years, should the Fed try to make it up by going above the target for a little while?

Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, said in an interview with The Wall Street Journal Friday, that it’s worth a debate. “Should we commit to following a policy that would return prices, as opposed to inflation, back to where people might have expected them to go in January 2012? That would mean you have to make up for the loss. Interesting question. Certainly it’s one I think that there should be a conversation about,” he said.

The idea is price-level targeting. Unlike targeting an inflation rate, the central bank would seek to keep the price level rising at a steady rate. When it misses on one side, it compensates temporarily by overshooting on the other. This idea of price level targeting isn’t a hot subject at the Fed right now, but we raise it here to highlight a shift that might be taking place in the internal dialogue.

Mr. Kocherlakota is one of the Fed’s doves, meaning he’s a supporter of low-interest-rate, easy-money policies. For a couple of years now the doves have focused on high U.S. unemployment as a reason.. High joblessness and slack in the economy, their argument went, called for low interest rate policies to boost growth and hiring.

Now the jobless rate is coming down. It’s been under 7% for three straight months – its best stretch since September-November of 2008. The doves have doubts about whether that is sending a clear signal about the economy’s health. At the same time, inflation continues to fall short of the Fed’s 2% goal. In January the Fed’s preferred inflation measure was up 1.2% from a year earlier.

The inflation underperformance is getting more attention from the Fed’s doves. “I think it is a signal of underutilization of resources,” Mr. Kocherlakota said. An inflation-targeting central bank should be as worried about undershooting inflation as well as overshooting it, he said.

With labor market measures like the unemployment rate sending mixed and complicated signals about the economy, debate at the Fed in the months ahead could turn to inflation, and how long the central bank is willing to tolerate undershooting its target. Maybe this also helps explain their willingness to leave short- term interest rates well below their traditional levels even as the jobless rate returns to its long-term norms, an issue we explain in a Wall Street Journal article today.

- By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

Fed Statement Doesn’t Explain Rate Hike Plan. Fed Chairwoman Janet Yellen caused a stir last week when she suggested the central bank might start raising short-term interest rates a little sooner than investors were expecting. In focusing on that, Wall Street might have glossed over news of greater consequence. The Fed, in its official policy statement, said it planned to keep short-term rates below what it sees as appropriate for a normal economy even after the unemployment rate and inflation revert to typical levels. Why do they want to keep short-term interest rates so low for so long? What risks are they taking in the process? The official policy statement didn’t explain. Ms. Yellen in her news conference acknowledged that even though officials agreed on the rate outlook, they don’t agree on the reasons for it. http://on.wsj.com/1mpgvT8

Yuan’s Decline Threatens Trade Tensions with U.S., Currency War in Asia. China’s central bank has intervened since late February to drive down the value of the yuan against the U.S. dollar by 2.8% so far in 2014, almost erasing all of its gains last year and ushering in a rare period of weakness for a currency which has steadily appreciated over the past decade. The People’s Bank of China argues the depreciation is needed to drive out speculators who were betting the yuan would continue to rise, according to people with direct knowledge of the central bank’s thinking. Beijing argues the yuan is approaching its fair-market value, pointing to the country’s shrinking trade surpluses. Still, officials and politicians in the U.S. and other Asian nations believe China is intentionally keeping the yuan below its true market value to give exporters an edge over competitors in overseas markets. http://on.wsj.com/1mnWYCo

China Shows More Manufacturing Weakness in March. A measure of China’s manufacturing activity showed further weakness in March, slumping to an eight-month low and suggesting that first-quarter growth for the world’s No. 2 economy will be disappointing. http://on.wsj.com/1f9Ko23

As China Slows Down, Is Stimulus in the Offing? Authorities have a number of levers at their disposal if they want to help the economy along – and some experts think they’re already starting to pull them. http://on.wsj.com/1lg8D5Z

Minneapolis Fed’s Kocherlakota Says Fed Not Moving to More Hawkish Stance. The Fed wasn’t trying to signal a shift toward more restrictive interest rate policies in communications after its Wednesday policy meeting, Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, said in an interview Friday. Some investors have taken the outcome of the meeting as a move toward a more “hawkish” monetary policy—toward raising interest rates a bit sooner and higher than previously expected. But Mr. Kocherlakota said he didn’t think that was the case. “The committee’s intention is not to move to a less accommodative policy,” he told The Wall Street Journal. As evidence he pointed to a line in the Fed’s official policy statement that noted, “the change in the [Fed's] guidance does not indicate any change in the [Fed's] policy intentions as set forth in its recent statements.” http://on.wsj.com/1dxqhu3

Fed’s Bullard: Yellen’s ‘Six Months’ Comment Not a Change in Policy Stance. Fed Chairwoman Janet Yellen was simply echoing prevailing market expectations when she stated the “considerable” period policy makers expect between the end to bond buying and the first interest rate hike was around six months, St. Louis Fed President James Bullard said Friday. “The private sector had that kind of number penciled in,” Mr. Bullard said in response to questions at a Brookings Institution panel. Ms. Yellen’s “six months” reference led to a sharp selloff in the stock and bond markets as investors worried that interest rate increases might be coming as soon as spring 2015—before markets had been anticipating. http://on.wsj.com/1iLgOob

Fed’s Fisher: ‘Sloppier’ New Guidance Has Advantages. Dallas Fed President Richard Fisher said Friday that the U.S. central bank’s revamped interest-rate guidance might be “sloppier” than its previous incarnation but should be less vulnerable to any errors officials make in their forecasts. In a speech at the London School of Economics, Mr. Fisher said the Fed has entered “unexplored territory” but that its new guidance is aimed at smoothing the transition between the Fed’s expansionary period of large-scale asset purchases and the eventual return to higher interest rates. http://on.wsj.com/1kQiYmB

Fed’s Williams: Monetary Policy Best Not Aimed at Bubbles. The Fed should use policy tools other than interest rates to deal with potential risks to financial stability or asset bubbles, San Francisco Fed President John Williams said Friday. Policy makers must consider “what tools do we have instead of going to the old debate of using monetary policy to deal with financial stability issues,” Mr. Williams said as part of a panel discussion at the Brookings Institution. Still, he suggested bubble concerns shouldn’t currently be at the forefront of policy considerations. “Today we are still most generally in a risk averse state, not a risk loving state,” Mr. Williams said.—Dow Jones Newswires

Fed’s Stein: Monetary Policy Should Be Used Against Bubbles. Fed Governor Jeremy Stein on Friday said the central bank should raise interest rates when needed to prevent financial excesses from building in markets and argued the bond market may provide guidance to policy makers on when financial vulnerabilities exist. Specifically, Mr. Stein argued that the Fed needed to look carefully at interest-rate markets for signs of excess that could signal future instability. For instance, when long-term interest rates were unusually low compared with the outlook for short-term interest rates, or when investors demanded small premiums on risky debt such as corporate bonds or mortgage bonds relative to low-risk debt like Treasurys, instability in credit markets might be brewing which could later damage the broader economy, he said.—Dow Jones Newswires

Fed Revises Stress Tests. The Federal Reserve revised its stress-test results for 15 large banks a day after releasing its annual report card, producing a weaker outcome for Bank of America Corp., American Express Co. and HSBC North America Holdings Inc. Despite the changes, 29 of 30 banks still were said to have enough capital to continue lending even if faced with a hypothetical jolt to the economy. http://on.wsj.com/1laMohX

BOJ’s Kuroda: Will Ease Policy if Tax Hike Derails Growth. A looming rise in Japan’s consumption tax shouldn’t derail economic growth, the governor of the Bank of Japan said Friday. Gov. Haurhiko Kuroda said in a speech at the London School of Economics that a planned rise in the consumption tax in April to 8% from 5% may dent growth temporarily but it isn’t expected to interrupt a “virtuous circle” of rising production, incomes and spending. He added that if the economy does veer off course the central bank will loosen policy further “without any hesitation.”—Dow Jones Newswires

BOJ Lifts Embargo on Kuroda News Conferences. The BOJ said Monday that it has given the media the green light to broadcast, stream, publish or even tweet his closely-watched remarks in real-time. http://on.wsj.com/1dhL5uF

ECB’s Liikanen Says Policy To Stay Easy. The ECB Bank will stick to its accommodative monetary policy stance to help the euro area economy recover properly, governing council member Erkki Liikanen said Monday. http://on.wsj.com/1kXcxhA

ECB’s Constancio Concerned About Risk to Recovery, Low Inflation. The euro zone’s tepid economic recovery is “real” but plenty of risks remain, including the prospect of slower growth in emerging markets and the possibility of an escalation of tensions between Russia and Ukraine, Vitor Constancio, European Central Bank’s deputy president, said Saturday. Mr. Constancio also expressed concern about “very low” inflation, which at 0.7% remains far below the central bank’s official target, which is below but close to 2%. http://on.wsj.com/1mn75rb

Euro-Zone Inflation Pressures Ease. Businesses in the 18 nations that share the euro cut their prices at the fastest pace since last July, while activity slowed slightly in March—Dow Jones Newswires

BOE Faces Disagreements Over Rate Rise. Bank of England officials disagree over how much spare capacity there is the U.K. economy and are likely to disagree over the best time to raise interest rates, Monetary Policy Committee member David Miles said Monday.http://on.ft.com/1juOMfa

Bank of England’s Trust in Banks “Badly Mistaken”, Says Former Official. The Bank of England needs to abandon a culture of cozy chats and too much trust in banks following the latest financial scandal to hit London, former BOE policy maker Adam Posen, now president of the Peterson Institute for International Economics, said on Friday. BoE Governor Mark Carney unveiled a major shake-up of its management on Tuesday, in part to tackle complaints from lawmakers that the central bank had been too slow to spot signs of financial misconduct in the past. http://reut.rs/1h37oju

Workers Made Out Better Than Companies in U.K., BOE Official Says. One of the assumptions about the financial crisis and its aftermath has been that labor lost out to capital right across the developed world. Workers were turfed out of their jobs as corporations cut back mercilessly to protect their profits. Companies and their owners snatched a bigger share of a shrinking economic pie. But that assumption doesn’t fit with data in the U.K. — at least not according to Ben Broadbent, the BOE’s next deputy governor for monetary policy http://on.wsj.com/1gGxBn8

Mexican Central Bank Holds Rates Steady. Mexico’s central bank kept interest rates unchanged Friday, saying that while the inflation outlook has improved following a rise in consumer prices in January, the economy still isn’t showing clear signs of recovery. The central bank, led by Gov. Agustín Carstens, kept its overnight lending rate target at a record-low 3.5%, in line with market expectations. http://on.wsj.com/1fMPKQb

Colombia Holds Key Rate at 3.25% and Extends Dollar Buying. Colombia’s central bank left its benchmark interest rate unchanged for an 12th straight month, and extended its dollar purchase program after the peso rallied the most in the world. In a unanimous decision, the bank’s seven-member board, led by Governor Jose Dario Uribe, held the policy rate at 3.25 percent today, the lowest among major Latin American economies. http://bloom.bg/1iLq3EP

Venezuela Plans New Market With Flexible Exchange Rate. Venezuela’s Socialist government, facing weeks of street protests, is loosening currency regulations as it tries to jump-start an economy plagued by shortages of food and consumer goods. Officials say a new currency market will launch Monday with a flexible exchange rate determined by supply and demand—a rare move out of free-market textbooks. It marks the first time in four years that businesses and individuals will have a legal channel to acquire dollars outside of government agencies. http://on.wsj.com/1eC90DG

GRAPHIC CONTENTJust One Large U.S. City Saw Unemployment Rise From Last Year. Unemployment in the Cleveland, Ohio, region increased slightly in January from a year ago, making it the only major U.S. metro area to have a jobless rate increase over the year. The unemployment rate in the Cleveland-Elyria-Mentor metropolitan area was 7.6% in January on a seasonally adjusted basis, 0.3 percentage point higher from a year earlier, the Labor Department said Friday. The national unemployment rate was 6.6% in January, down from 7.9% in January 2013.http://on.wsj.com/1f9I4rS

COMMENTARY
Steven Rattner, a long-time Wall Street executive, writes in the New York Times that Europe is mired in a slow-growth rut with little sign of either sensible policy initiatives or the energy to implement them. “Some see salvation in more aggressive moves by the E.C.B. Fine — avoiding deflation is a worthy goal. But recognize that the Federal Reserve’s bond-buying program reduced unemployment by only a smidgen. Europe still must face the need for more fundamental change and not be distracted by those who see a central bank’s printing press as a painless way out,” he writes. http://nyti.ms/1fLZ0ny

BASIS POINT
French private sector activity expanded in March for the first time since last October and at the fastest pace in more than two years, data showed Monday. http://on.wsj.com/1nT9RpF

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